Buying IPOs (or not!)

Hi,

I read about some fund managers not buying IPOs for at least 5 years - the reason being that the seller of the company involved always has control over the timing of the IPO, and generally they will float their company at the most opportune moment - and to be fair, why wouldn’t you?

Further, waiting 5 years, or for a longish period post IPO before investing, would allow all of the pre-IPO issues, if they exist, to become visible thus eliminating the IPO’s ‘unknown unknowns’.

It’s not a new idea. I think Buffett and Munger discussed it decades ago, but some retail investors still love a good story sold to them by the backers of the IPO? The backers are very good at telling stories - it’s a very important part of their skillset and what they are paid to do. Not their fault, really. Sometimes they are left holding stock post-IPO, because they guaranteed to buy if if they didn’t sell the stuff pre-IPO. They have to shift it somehow!

I looked at all of the IPOs which floated during 2016, just because this was a reasonable period of 5 years ago. There were 74 of them if you exclude the MaxCyte duplication. And the opening price was the price after listing, available to all retail investors - maybe a little different from the offer price. (But this doesn’t matter because retail investors aren’t invited to most IPOs at the offer price).

Some random statistics which I think I calculated correctly, were:

  • The minimum price attained, post-IPO, occurred on average, 3.3 years post the IPO date, thereafter the share price was above this level, unless the minimum price was achieved yesterday.

  • The lowest share price to date was some 45%, on average, of the float price. This seems incredible to me! Please bear in mind that of the 74 companies floated during 2016, 11 of these companies still had all time lows during 2021 (for these 2016 IPOs).

  • Roughly 50% of the 2016 year IPOs were at a loss position after approximately 5 years, distribution as follows (apologies for ignoring dividends):

From float until now Number of companies Accumulative number of companies Acc %
lose 90%+ 5 5 6.8
lose 80%-90% 8 13 17.6
lose 70%-80% 5 18 24.3
lose 60%-70% 5 23 31.1
lose 50%-60% 3 26 35.1
lose 40%-50% 4 30 40.5
lose 30%-40% 1 31 41.9
Lose 20%-30% 2 33 44.6
lose 10%-20% 3 36 48.6
lose 0%-10% 3 39 52.7
gain of 0-0.5x 11 50 67.6
gain of 0.5x-1x 6 56 75.7
gain of 1x-2x 9 65 87.8
gain of 2x-3x 3 68 91.9
gain of 3x-4x 1 69 93.2
gain of 4x-5x 0 69 93.2
gain of 5x-6x 0 69 93.2
gain of 6x-7x 0 69 93.2
gain of 7x-8x 1 70 94.6
gain of 8x-9x 0 70 94.6
gain of 9x-10x 2 72 97.3
gain of 10x+ 2 74 100.0
Total 74

where 10x means 10 times etc

  • Of the 74 companies, 73 traded at a subsequent price which lower than their opening price on the first day of trading.

My personal conclusion is that it is a sensible idea not to purchase IPO companies until a few years have past after the float. Plenty more fish in the sea IMO and the risk/reward is unfavourable until at least a 4 annual reports have been published, post-IPO, and maybe more?

Regards,

anon

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Hi anon,

I thought it might be interesting to compare your IPO performance distribution data to the wider market. The charts below show the cumulative 5yr performance distributions for companies in the AIM All Share and the FTSE All share (yellow bars) compared to the IPO distribution data (Acc % column in the table above - blue bars).

aim-5yr-cumulative-dist

allshare-5yr-cumulative-dist

The AIM All Share distribution is a remarkably good match which suggests that investing in AIM might have a similar risk profile to investing in IPOs.

The FTSE All share distribution fares much better with ~33% of losers after 5yrs compared to ~53% of losers on AIM.

The above probably highlights the importance of a good screening process when investing in AIM or in IPOs.

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Hi MIA1,

That’s interesting, thank you! - a bit of an eye-opener, in terms of the risks of investing in AIM .

By number of investments, 25% of my portfolio is invested in AIM listed companies. I will need to go through the upside on each them, to justify the larger risk of future loss…

As to why this is the case, all I can think of is;

  • lighter touch regulation within AIM
  • generally AIM listed companies are younger, which does increase risk.
  • possibly it is easier for AIM companies to access equity capital due to the Inheritance Tax exemption

Regards,

anon

Hi anon,

Thanks for the great work!

The 50% of winners are interesting, especially the four outliers that 9-bagged or more. I think they skew the results so an investor picking random IPOs from 2016 would on average have done well – assuming they acquired one of the four 9-baggers!

My rough sums:

From float until now No. of companies Value (1 being no change) Value * no. companies Overall return
lose 90%+ 5 0.05 0.25
lose 80%-90% 8 0.15 1.20
lose 70%-80% 5 0.25 1.25
lose 60%-70% 5 0.35 1.75
lose 50%-60% 3 0.45 1.35
lose 40%-50% 4 0.55 2.20
lose 30%-40% 1 0.65 0.65
Lose 20%-30% 2 0.75 1.50
lose 10%-20% 3 0.85 2.55
lose 0%-10% 3 0.95 2.85
gain of 0-0.5x 11 1.25 13.75
gain of 0.5x-1x 6 1.75 10.50
gain of 1x-2x 9 2.50 22.50
gain of 2x-3x 3 3.50 10.50
gain of 3x-4x 1 4.50 4.50
gain of 4x-5x 0 5.50 0.00
gain of 5x-6x 0 6.50 0.00
gain of 6x-7x 0 7.50 0.00
gain of 7x-8x 1 8.50 8.50
gain of 8x-9x 0 9.50 0.00
gain of 9x-10x 2 10.50 21.00
gain of 10x+ 2 11.50 23.00
Total 74 129.80 1.75

Assuming each share returned the mid-range of its classification and the two 10-plus baggers were between 10- and 11-bags, I reckon buying all 74 shares would have delivered a 75% overall profit. Exclude the four outliers and the overall gain reduces to 23%.

Maynard

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Hi

Thanks Maynard!

Just for your interest, the top 5 baggers from 2016 IPOs were:

  • Blue Prism @ 10.7 bags. Robotic process automation. Loss making on admission.
  • AddLife AB @ 10.7 bags also. Labtech and Medtech advisory. Foreign listing.
  • Cerillion @ 9.3 bags. Software co. Negative free cash flow on admission
  • Maxcyte @ 9 bags. Heathtech. Loss making on admission. Still loss-making
  • Mkango Resources @ 7.3 bags. Exploration for rare earth elements. Loss making on admission. Still loss-making

If I am honest, I wouldn’t have chosen any of the 5 above to invest in, so I’m not playing the IPO game!!!

Full listing below.

Regards,
anon

TIDM Name % gain from float price
0REZ AddLife AB 1077.1
PRSM Blue Prism Group PLC 1071.6
CER Cerillion PLC 930.3
MXCT Maxcyte Inc 909.7
MKA Mkango Resources Ltd 735.6
TSL ThinkSmart Ltd 337.2
SFOR S4 Capital PLC 281.3
FRAN Franchise Brands PLC 257.5
THS Tharisa PLC 214.9
0RKL Xvivo Perfusion AB 194.2
GROW Molten Ventures PLC 187.2
MIDW Midwich Group PLC 173.9
HOTC Hotel Chocolat Group Ltd 167.0
WJG Watkin Jones PLC 143.6
0P6E First Quantum Minerals Ltd 129.2
LUCE Luceco PLC 127.2
ASCL Ascential PLC 116.2
BIFF Biffa PLC 100.6
CSP Countryside Properties PLC 94.8
0RHV Investis Holding SA 81.6
CREO Creo Medical Group PLC 80.7
MOTR Motorpoint Group PLC 61.7
W7L Warpaint London PLC 58.1
0RF6 Taaleri Oyj 52.4
FLTA Filta Group Holdings PLC 49.7
DCTA Directa Plus PLC 46.2
TBCG TBC Bank Group PLC 45.6
GCG Golden Rock Global PLC 41.7
FORT Forterra PLC 41.6
CRC Circle Property PLC 34.7
BOWL Hollywood Bowl Group PLC 34.3
ONC Oncimmune Holdings PLC 32.3
PMI Premier Miton Group PLC 29.2
YU. Yu Group PLC 19.5
GCAT Caracal Gold PLC 2.0
CMCX CMC Markets PLC -0.6
JOUL Joules Group PLC -6.7
VMUK Virgin Money UK PLC -6.8
CTEC ConvaTec Group PLC -12.7
FPP Fragrant Prosperity Holdings Ltd -14.4
0RHT SIF Holding NV -19.2
AURA Aura Energy Ltd -26.3
0RFI Brain Biotechnology Research & Information Network AG -28.0
SECN Sec Newgate SPA -37.9
JET Just Eat Takeaway.Com NV -42.5
MCL Morses Club PLC -47.2
MDC Mediclinic International PLC -48.7
IDP InnovaDerma PLC -49.3
VANL Van Elle Holdings PLC -53.7
BMV Bluebird Merchant Ventures Ltd -57.0
TMO Time Out Group PLC -58.1
MILA Mila Resources PLC -60.7
ECSC ECSC Group PLC -61.4
SDX SDX Energy Inc -62.5
ACRL Accrol Group Holdings PLC -65.9
0RFM Figeac Aero SA -69.5
0P6A Signet Jewelers Ltd -71.3
WSE Work Service SA -73.8
OBD Oxford BioDynamics PLC -75.5
STX Shield Therapeutics PLC -79.1
LOOP LoopUp Group PLC -79.8
XPF Xp Factory PLC -80.7
DVT daVictus PLC -81.8
BIH Boston International Holdings PLC -82.0
BION Bion PLC -83.5
OSI Osirium Technologies PLC -83.5
0RFZ Lehto Group Oyj -84.6
AUTG Autins Group PLC -88.9
ANGS Angus Energy PLC -89.4
COM Comptoir Group PLC -90.7
APQ APQ Global Ltd -90.9
TOOP Toople PLC -95.1
MTRO Metro Bank PLC -95.3
0RFB Senvion SA -99.7
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Have to say the only one that might have tempted me is Maxcyte. Blue Prism, for me, belongs with Ocado and Amazon. Amazon, if I understand it, became profitable by pivoting to Web services. Its base business remains unprofitable. Ocado might become profitable by its “merge” with M&S, but its robotics business still looks ropy. Obviously HRI have bet the farm on Blue Prism but I remain unconvinced despite its massive success. I think I am debating myself into schizophrenia…

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Full disclosure, I did hold HOTC for 3 years and emerged with 16% profit. It was a real roller-coaster ride. It’s only up £1 since I sold. So I think it’s a stock to hold and forget you own it.

As for Mkango, perhaps the little that I know stops me from making the leap. Rare earths are actually quite common. But they all turn up together and in very small concentrations. And it costs large amounts to isolate them. And the processes involve very noxious chemicals. And users only want minute quantities. So common sense says - avoid.

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